All Things Market Related – December 2019

 

Australia

The ASX200 Index closed the month up +2.74% on positive rhetoric about a trade deal being finalised between the US and China. Markets have crawled towards record levels in both the US and Australia but it won’t be any surprise to see markets fall if there is any disruption to these talks. The Trump administration will want to make sure a deal is done before heading into the November 2020 election.  Westpac was put on notice after AUSTRAC alleged that it breached the Anti-Money Laundering and Counter-Terrorism Financing (AML/CTF) Act on 23 million occasions. This included failing to carry out appropriate customer due diligence on transactions to the Philippines and South East Asia that have known financial indicators relating to potential child exploitation risks. The failure sparked fears that Westpac may be dealt a major penalty by AUSTRAC in 2020, shares fell some 13.1% for the month.

In economic news, wages growth remains soft down to 2.2% yoy in Q3 from 2.3% in Q2. The housing market in Sydney and Melbourne was responding to the three rate cuts delivered since June which should feed into the broader economy. The RBA has so far cut rates three times to 0.75%. There is a good chance that growth in Australian household spending will gather pace. The RBA believes the economy has reached a “gentle turning point” and expects growth to be around the 3% by 2021.

Global Markets 

Wall Street closed up 3.72% and the S&P 500 was up 3.42% both recording firm gains in November on the back of the US-China trade talks, central bank interest rate decisions and various economic data. On November 15, the Dow pushed past the 28,000 point mark for the first time in US history after US Commerce Secretary Wilbur Ross said there was a high probability of a trade deal.

Asian markets were generally weaker, as Hong Kong is one step from civil war. China has announced that it will retaliate for US action on Hong Kong Beijing and may impose unspecified sanctions on US-based human rights groups in retaliation for the United States passing legislation that will scrutinise Hong Kong’s human rights record each year.

 

December outlook:

There are a few things Australian investors need to keep their eyes on:

  • Whether the Trump administration will look to cut a deal on US-China trade negotiations.
  • Retailers gearing up for Christmas sales period. Investors may start to look at retail stocks after Black Friday and Cyber Monday deals.
  • Profit taking before the end of the year holidays.

 

Here are a few useful charts and tables from BanyanTree Research.

 

BanyanTree View

 

There is never a dull moment in financial markets.

 

U.S. Phase-One Trade Deal

It has been reported U.S. President Donald Trump has signed off on a phase-one deal, which will importantly prevent additional tariffs being introduced on 15 December on approximately $160bn consumer goods. From our perspective, its 13 Dec-19 and something had to be announced hence it shouldn’t come as a surprise. Further, it was noted terms are agreed but legal text has not. Part of the deal is a promise by China to buy more agricultural products (nothing new here). Nothing firm on removing existing tariffs though. No developments on the structural changes the U.S. seeking. On balance this is a positive update but one the market probably was anticipating.

 

BREXIT – Looks like Labour (UK) didn’t learn much from Labor (Australia)

U.K. exit polls a forecasting a majority win for Boris Johnson’s conservative party, predicting that he will secure 368 of 650 seats up for grabs in the House of Commons. To put it in context, if this majority holds at the final count, this will be the biggest win for his party since Margaret Thatcher’s in 1987. This now means the U.K will leave the European Union next month (revised deadline of 31 January 2020). With less radical policies to opposition leader Jeremy Corbyn (he wanted tax hikes + nationalisation of some industries) and certainty over Brexit date, the markets are likely to react positively. The pound is up at the time of writing. Quick perspective on the impact of the uncertainty – the Bank of England Governor Mark Carney recently noted that the current level of investment is approximately 25% below where investment would if there was not Brexit uncertainty. Whilst it is very early days (and plenty of details still to work out), it is a positive start to perhaps finally putting the Brexit saga in the rearview mirror.

 

How have we exposed to Brexit in our portfolios? We have been highlighting the opportunities and challenges around Brexit since the start of 2019 – discussed multiple times in our Multi-Asset Strategy Quarterlies.

 

Australian Equity Strategy – we hold overweight positions in Virgin Money UK (ex CYBG Plc) (UK Bank) and Janus Henderson Group (Fund Manager with extensive European operations)…both of which are rallying today on the back of early exit polls, in our view. We note Virgin Money has significantly outperformed the market in the second half of this year as Brexit comes to a head (specifically the realisation a hard Brexit was likely off the table) and but operationally the Company provided a positive FY20 outlook on net interest margins at the recent full year results. Janus Henderson has consistently outperformed the broader ASX200 this year and continues to offer an attractive yield of 6.0% (even after the rally – the stock was offering sustainable yield of >8% start of the year!).

Source: Bloomberg, Banyantree

 

Multi-Asset Strategy – We hold the Platinum European Fund in our SAA portfolios, which as at 30 Nov-19 had about 7.4% exposure to the UK (unfortunately). However, in our Global Macro Strategy (our tactical asset allocation portfolio), we hold a broad exposure to the FTSE 100 Index and a UK equities focused (predominantly FTSE 70 stocks) long-short manager. It has been a solid year for markets and, pleasingly, we have picked up these gains + some. I know there is a lot of conjecture in the market about loading up on complex and “sexy” alternatives in recent years. I believe investors are again underestimating liquidity risks. To date we have managed to find returns from your typical boring, highly liquid asset classes. Obviously tomorrow is a new & different day and we are constantly looking for new investment opportunities.

 

Key Calls 2019 Update

At the start of every year, we publish a list of ASX-listed stocks which we believe will outperform the broader market. They tend to come from a wide range of industries and market cap. Our bucket of picks in CY2017 (6 stocks) on average delivered +67% vs ASX200 Total Return Index +11.8% and in CY2018 (10 stocks) on average delivered +3.3% vs. ASX200 Total Return Index -2.8%. Pleasingly, with only weeks left in CY2019, our key picks (below) as a bucket is up +31.4% vs. ASX200 Total Return Index +23.6%. One of more pleasingly calls this year was Bingo Industries. We conducted multiple management meetings, a site visit and extensive bottom up research. However, most will recall, the Company came out with a profit warning early on in the year. Maintaining our conviction through this (and retaining a Buy rec) paid off.

Source: Bloomberg, Banyantree